More people stashing their money in CDs

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Amid unprecedented turmoil in the nation's financial system, small investors around the country have been stashing their money in certificates of deposit at a record pace.In the last week of September, deposits in bank CDs of less than $100,000 grew by $13.4 billion, the biggest weekly jump in at least 33 years, according to Federal Reserve data.Banks hungry for deposits have driven a bidding war on CD rates, sweetening the pot for consumers looking to maximize returns on a safe, federally insured investment. While the average rate of return nationally for a six-month CD is 3.14 percent, according to Bankrate.com, many banks and credit unions are offering substantially higher returns to lure new customers.Alicia de la Garza, a student at California State University, Sacramento, recently took money from stocks and her savings and put it in an eight-month CD with a 4 percent return at Washington Mutual."I figured it was good to lock it up in there," she said.When the term is up on de la Garza's CD, she said, she plans to pull the money out and shop around for the best rate.For banks, "rate surfers" like de la Garza represent the risk of using high CD rates to troll for new customers, said Anat Bird, a bank industry consultant in Granite Bay, Calif."Banks have the perception that they'll cross-sell (those customers) on other services, but it never pans out," Bird said. "All they do is raise their deposit costs."Comparison shopping for CDs is getting easier, said Casey Frye, a certified financial planner at Wurm and Frye Investment Advisory Group in Roseville, Calif.Though many consumers keep their CDs in banks and credit unions close to home, Frye said, brokerages typically offer a number of options for high-yielding CDs at banks across the country.Online sites such as Bankrate.com offer comparisons of standard-term CD rates at banks nationwide.It's tougher, however, to comparison shop for the so-called "odd term" CDs that are often the centerpiece of bank marketing campaigns.Rick Barham, president of Market Rates Insight in San Rafael, Calif., said banks like to advertise odd-term CDs - which mature at intervals other than the standard three- and six-month and multiple-year CD terms - precisely because there aren't many direct competitors. The strategy is to create an instant market niche, Barham said."If you pick the right odd term, you can own it," he said.Eddy Gutierrez, a financial consultant with Charles Schwab in San Francisco, cautioned that promotional CDs often come with catches such as limits on deposits. And some - though certainly not all - of the banks offering the best rates of return are those on the shakiest financial footing.Greg McBride, an senior analyst at Bankrate.com, said he expects CD rates to drop somewhat in the near future, in response to last week's interest rate cut by the Federal Reserve.CD rates usually track what's known as the federal funds rate, a measure of how costly it is for banks to borrow money.When the federal funds rate drops, it tends to get less expensive for banks to borrow, which means they have less incentive to attract deposits by offering high rates on CDs.This year, however, the credit crunch has made borrowing more expensive. CD returns have remained relatively stable even as the Federal Reserve has cut its benchmark interest rate from 4 percent to 1.5 percent.Whatever rate CDs are paying, they can look good compared with the potential losses in the volatile stock market.Mike Duffek of Sacramento, who works for the state Department of Corrections, said he moved his assets into Treasury bills and CDs earlier this year."I predicted this bubble bursting six months ago," he said. "It was inevitable."E-mail Jim Downing at jdowning(at)sacbee.com(Distributed by Scripps Howard News Service, www.scrippsnews.com.)